Kenya Agribusiness Report Q1 2013

We see little change to our Kenyan coffee and sugar forecasts over the forecast period. At the time of writing, we expect the country’s food security situation to remain relatively stable over end-October and November 2012. Indeed, the number of people on food assistance has fallen dramatically between June and September. Over the long term, we favour the corn over the wheat sector in terms of production. Wheat production should remain challenging given the country’s climate. We are more optimistic regarding corn production, as domestic producers enjoy some degree of trade protection depending on the domestic production balance. Greater use of GM seeds in the future is a key upside risk to corn production over the long term.

Key Views:

- Corn production growth to 2016/17: 19.0% to 4.1mn tonnes. This will be a function of improved farming methods, domestic demand and the eventual introduction of genetically modified seeds.

- Wheat consumption growth to 2017: 7% to 1.3mn tonnes. Kenyans already have a high rate of wheat consumption by regional standards. Slight improvements in availability and population growth will drive consumption.

-
Coffee production growth to 2016/17: 46.0% to 975,000 tonnes. Growth will be driven by increased financial support from the government in the form of funds and debt relief. Also, new coffee varieties planted should help to boost yields.

- 2013 real GDP growth: 5.8% (up from 4.5% in 2012; predicted to average 5.9% from 2012 until 2017).

We have revised up our 2011/12 Kenyan corn consumption figures to 3.0mn tonnes owing to changes in historical data. For 2012/13, we have revised our forecasts lower to 2.7mn tonnes, largely owing to late plantings, fertiliser and seed shortages, and disease problems, according to local sources. The planting season for long-rains corn occurs in March and April. In major growing areas such as the Rift Valley and Nyanza provinces, grain harvests have begun and will likely continue into the new year. However, there have been irregular rains in parts of Nyanza and disease outbreaks, particularly Maize Lethal Necrosis Disease (MLND), in the parts of the Rift Valley. MLND has been observed in other parts of the world,including the US, and can lead to a complete loss of crop, depending on the time and ferocity. Plantings for the short-rains crops has started in Eastern and coastal areas, and adequate rains could mitigate some of the damage to the long-rains crops. However, we expect the country to remain a net corn importer for the 2012/13 season.

Over the longer term, we see more potential in Kenya’s corn sector than its wheat sector. Wheat production in Kenya will remain challenging, as mild weather facilitates disease. For instance, wheat stem rust has long been a major concern and once observed, farmers are required to spray (expensive)fungicides twice just before the harvest just to ensure even minimal yields. Our outlook for the corn sector is brighter. The country’s 50% tariff on corn imports from outside the Common Market for Eastern and Southern Africa (COMESA) helps keep farmgate prices high. This is exacerbated by the country’s import requirements for GM corn, which could negate cheap South African imports Second quarter growth data recently released by the Kenya National Bureau of Statistics support our view that 2012 would be a year of two halves for the Kenyan economy. Real economic expansion slowed to 3.3% y-o-y in Q212, down from 3.5% in Q112 and 3.6% in Q211. However, we believe that the second quarter data represent a bottom for the Kenyan economy and although a subdued external environment will weigh on growth to some extent, we expect GDP expansion to begin to pick up during the final two quarters of 2012 thanks to a rapid improvement in domestic economic conditions. Indeed, rapidly falling inflation – which has plunged by 14.4 percentage points to 5.3% in September from a peak of 19.7% only 10 months earlier – and declining domestic interest rates will imbue Kenyan firms and consumers with greater confidence, which should see economic growth accelerate towards our full-year 2012 growth forecast of 4.5%.
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